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3 Currency ETFs Hit Hard By Taper Talk

The June FOMC meeting and subsequent Bernanke press conference didn’t disappoint. Markets experienced huge levels of volatility on the news release as traders digested the new information.

In particular, investors focused in on a rosier outlook from the Fed, especially in terms of unemployment figures which the Committee now believes could hit the 6.5% mark at some point in 2014. This is somewhat surprising given that employment was lower for the most recent reading, and that the earlier projection from the Fed called for the 6.5% unemployment figure to be hit in 2015 instead.

There was also a bit of news in the press conference when Bernanke declared that they will probably slow down the bond buying later this year, and then end it completely if unemployment hits 7% at some point in 2014. Though, this was qualified with a statement of being dependent on the economic outlook, suggesting it might not be as clear cut as it reads.

The news wasn’t well received by the markets though, as stocks sold off and bond yields soared during and immediately following the press conference. Clearly, investors read the FOMC’s statement and the Bernanke press conference as leaning towards tapering sooner rather than later, pushing investors away from riskier assets and reevaluating the appeal of bonds as well.

This news also helped to push the dollar, as represented by UUP, sharply higher on the day. The ETF finished the session up by just under 1% on volume that was roughly 1.75 times normal.

While the gains for the dollar were broad based against a variety of currencies, some did lose quite a bit more than others. Beyond the stimulus-fueled yen, investors saw big losses in a number of resource-based currencies and these led the way lower in terms of negative trading (read Winning ETF Strategies for the Second Half).

Below, we highlight three of the worst performing currency ETFs on the session, which were undoubtedly the most influenced by the FOMC meeting. These currencies, and thus their respective nations, could be ones to avoid in the weeks ahead too, as they could be in for more sluggish trading if taper talk intensifies and the dollar continues to strengthen in the months ahead:

The Brazilian currency, much like their overall economy, has been struggling mightily as of late. Inflation risks and poor growth have kept the economy under pressure, leading to big losses in the stock and currency markets of the nation.

This trend by and large continued after the FOMC announcement, as BZF stumbled by 2.3% on the day. The move away from the real was largely thanks to lower demand for high-yielding, but volatile, emerging market currencies, as well as a lessened appetite for commodity currencies after a broad natural resource drop as well.

This continues the rough stretch for BZF, as the ETF has slumped by close to 8% in the past three month period as well. Brazilian stocks have been even worse, with the popular EWZ losing nearly 20% in the YTD time frame, suggesting broad-based pain for the country (read The Key to International ETF Investing).

Much like in Brazil, Australia has been facing a bout of troubling economic conditions as well. Its economy is also centered on commodities, while its main export partner (China) has struggled, putting the pressure on the Aussie economy.

This wasn’t helped by the Bernanke press conference either, as FXA tumbled by about 1.8% on volume that was roughly three times normal after the Q&A session. Investors abandoned this currency, much like the real, as demand for higher yielding foreign assets tumbled, and concerns grew over commodity prices in the near term.

Although this is an actively-managed ETF, it too was crushed in the post-Fed announcement environment. That is because the fund is heavily focused on a number of volatile natural resource currencies which were among the biggest losers on the day.

Current top holdings include Canada, Norway, Sweden, and Russia, many of which are heavily dependent on oil. Beyond that, Australia and Brazil also combine to make up about 15% of assets, and we know how those have performed (see BZF and FXA above).

Thanks to this fund makeup, the ETF lost about 2.2% on the day, underperforming a number of similar products. However, it is worth noting that due to its active strategy, the ETF has extreme latitude to pick currencies, so it may not be focused on the same group going forward (read PIMCO Debuts Active Currency ETF).

Bottom Line

Resource currencies, as well as the yen, look to be strong avoids in the near term. Natural resource prices are being crushed, and there is a general risk-off trade brewing as well.

In this type of environment, it is probably best to avoid high volatility currencies and those that are tied to certain natural resources. These currency ETFs could continue to face severe losses, and be under pressure as taper talk intensifies later this year.